DeFi and Compliance

What is Decentralize Finance (DeFi)


Decentralized Finance (“DeFi”) is a blockchain-based form of finance that utilizes smart contracts unlike traditional financial service offerings such as banks, markets, and other investment services. Financial products become available on a public decentralized blockchain network without reliance on centralized authorities and stakeholders come together to build a permissionless ecosystem.


Decentralized finance is still in the beginning stages of its evolution. The total value locked in DeFi contracts is more than $85.91 billion, as of 11 September 2021 (https://defipulse.com/). The total value locked is calculated by multiplying the number of tokens in the protocol and their value in USD.




DeFi Charateristics:

  • DApps rely on smart contracts with no need of intermediaries/middlemen to process transactions being mostly non-custodial.

  • Permissionless enabling anyone to start using the platform

  • Global access with open- source protocols and projects that can be “forked”, meaning creating a new variation of an existing platform by altering the code.

So far, the DeFi ecosystem has developed known projects like Maker, Aave, Compound, Uniswap with new emerging ones coming up. Services include lending and borrowing, derivatives, margin trading, payments, asset management and nonfungible tokens with more diversification expected in the future.


DEFI Compliance


Decentralized applications (DApps) promote financial inclusion with no central or controlling entity empowering users and developers to create unique peer-to peer experiences unlike the traditional finance sector that has more stringent regulations. What about the risks and challenges then affecting users or more broadly adoption?

A regulated environment would empower innovation and create a safer environment where entities and individuals are protected, suspicious activities reported, hacking more limited with an overall injecting of trust attracting more mainstream organizations with larger investors in this space.


Compliance for Decentralized Apps would mean adherence to Anti-Money Laundering (AML)/CTF and Know Your Customer (KYC) procedures mission critical to assess risk and a legal requirement to comply with laws governing each jurisdiction. The Financial Action Task Force (FATF) has guidelines on VASPs (Virtual Assets Service Providers) where operators/owners of DApps could fall into , suggesting that DApps (DEXs and other DeFi Applications) will be responsible for complying with country-specific laws enforcing FATF, AML, and Counter-Terrorism Financing Standards (STF) standards.


In the United States, DeFi applications may be considered as money transmitters and subject to laws and regulations regarding Money Services Business (MSB). That would mean a requirement to register for appropriate operating licenses with potential enforcement actions against identifiable founders/operators for any failure to do so.


BSA/AML Policies for DeFi Applications


Defi Applications subject to the laws and regulations governing Money Service Business (MSB) must have under the Bank Secrecy Act (BSA) a robust Compliance program, effective written AML policies and a strong culture of compliance.

Criminal activity risks are real on Defi Platforms as they are growing in popularity while focusing on anonymity for users to stake, trade and perform operations independently of a centralized entity. The use of robust KYC and AML/CTF protocols will enable legal sustainability and KYC processes can safeguard the data privacy of users, effectively prevent problematic transactions and flag sanctioned addresses by the Office of Foreign Assets Control.


Are you looking for SME expertise for your DeFi project?


There is a shortage of expertise in the DeFi space around those topics. Here at UGR, we will help you navigate with success regulations, compliance and AML/KYC requirements needed in your growth journey. We have some of the finest industry experts covering multiple jurisdictions and work with the best digital asset compliance solutions in the industry to meet all your requirements. Our Compliance As a Service (CaaS) allows you to plan, prioritize, and execute against strategic compliance projects and technology initiatives while matching your budget and pay as you need.


Contact us today for a free 30 min consultation!



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